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Until recently, the promise of Arctic oil and gas continuously lured in energy companies (both domestic and foreign) in an attempt to get a piece of the action. In 2013, Ernst & Young had reported that the Arctic region could hold 13% of the world's untapped oil reserves, along with 30% of undiscovered gas reserves worldwide.

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In spite of this, there remains little doubt as to the costs associated with such oil exploration projects, with a difficult geographical environment making exploration costs on par with that of space exploration. This concern is understandably magnified greatly, with the recent slump in oil prices. Taking this into account, what lies in store for Arctic oil and gas projects going forward?

In spite of oil prices dropping by over 50% to under $60 per barrel – company responses have remained somewhat mixed. For instance, Royal Dutch Shell has stated its intentions to begin drilling in the Arctic region this summer, contingent on the awarding of permits. For Royal Dutch Shell, as is the case for many oil firms with a presence in the region, high costs will be incurred irrespective of whether drilling takes place or not, as maintenance costs will continue to be high. As an example, Royal Dutch Shell estimates that the project would cost $1bn regardless of whether drilling actually takes place.

However, other companies have not been as enthusiastic. For instance, Statoil has indicated that it will put its Norwegian Arctic drilling plans on hold for 2015, with Chevron suspending drilling plans in the Beaufort Sea indefinitely. Additionally, with the introduction of Western sanctions, Exxon Mobil has been forced to cease its joint venture exploration contract with Russian O&G firm Rosneft. As a result, Rosneft has been forced to also suspend drilling plans for this year and is reportedly hoping to resume in the summer of 2016. As a matter of fact, Western sanctions on Russia appear to be taking their toll on Russian O&G firms with Arctic exploration interests. Given the logistical difficulties involved in Arctic drilling projects, Russian companies have been dependent on Western know-how to ensure the proper development of offshore fields. In this context, Western sanctions will make this more difficult for Russian firms.

In terms of tax considerations, the same varies widely, with countries such as Russia and Canada typically providing better terms than that of Norway, for instance. Norway does not provide tax incentives for Arctic O&G exploration. Additionally, the country reduced the capital expenditure uplift that is allowed over a given four-year period to 22% from a prior 30%. However, Russia has continued to promote the development of Arctic projects, notably through the cancelling of export taxes from new offshore fields for a 5 to 15 year period, whereas previously export duties stood at approximately $460 per ton. This is contingent on 70% of offshore projects remaining under Russian ownership.

However, even with low taxes it is hard to make a case for the immediate viability of the projects given the slump in oil prices. Oil prices will recover but Arctic projects remain on hold in the case of many O&G companies. Should the industry thrive in the future, I see large, integrated O&G firms such as Royal Dutch Shell as being in the best position to thrive. We have already seen that Shell has among the greatest capacity to continue drilling in the Arctic region, and the fact that Russian companies are dependent on Western expertise to conduct such projects means that it will likely prove difficult for Russia to be overly stringent in terms of Russian ownership policies. Therefore, I see larger firms like Shell having the most to gain from continued development in the region should prices rebound to vibrant levels medium-to long-term.

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